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Difference between Money Wage and Real Wage

Key Difference: Money wages or nominal wages are wages that are paid to a person regardless of the inflation rate in the market. Money wages do not take into consideration the purchasing power and the employee receives the amount that is promised to him when he/she is hired. Real wages are wages that provided taken into consideration the inflation amount. Real wages are wages that determine the purchasing power of the individual or how much goods the salary can buy. Real wages can also be defined as the amount of goods and services that can be bought from the individual’s wages after taking inflation into account.

Economics is a complicated subject that deals with a variety of topics that are related to the economy of a state, country and even the world. Economics is a field that is responsible for analyzing, predicting and flow of goods and money in an economy. Wages is one of the many different topics that are grouped under this vast field of study.

Wages are basically the pay that a person receives when they have performed a duty or a service. A person that does labor or a service for a certain company or institution is paid in money or wages in terms of remuneration. He may also be given certain benefits such as sick leaves, accommodation allowance, travel expense, etc. These are known as fringe benefits. These benefits often tie in the salary packages. However, not all jobs provide salary packages, some jobs offer just pay for the type of job that has been done; these are known as temporary jobs. There are two types of wages that can be paid Money Wage and Real Wage. These are often confusing for many people as they are not aware that there are different types of wages that exist.

Money wages or nominal wages are wages that are paid to a person regardless of the inflation rate in the market. Many companies use this method to pay their employers. Money wages include the whole salary package of the employee such as basic salary plus any additional benefits that are provided by the company or institution. Money wages do not take into consideration the purchasing power and the employee receives the amount that is promised to him when he/she is hired. Raise in money wages are also solely dependent on the employee rather than economic conditions of the country or the purchasing power of a basic employee.

Real wages are wages that provided taken into consideration the inflation amount. Real wages are wages that determine the purchasing power of the individual or how much goods the salary can buy. Real wages can also be defined as the amount of goods and services that can be bought from the individual’s wages after taking inflation into account. Some dictionaries also define it as providing goods and service to the individual in form of remuneration. However, only select places follow this definition.

According to author J.L. Hanson, “Real wages is the wages in terms of the goods and services that can be bought with them.” This shows that real wages show the purchasing power of the person. Real wages indirectly affect the money wages, since as real wages rise, they may force employee to demand a higher money wage. Money wages may or may not affect real wage, but higher money wages can increase the cost of living which could indirectly affect the real wage. This depends on the situation of the country.

Money wages and real wages differ depending on the place and country. While real wage may be higher in metropolitan or urban areas, it may be low in small towns or villages. Real wages also take into considered the amount of benefits that a person receives. For example: if the laborer receives food or accommodation this counts as real wage as they are getting paid in terms of what the money can buy. Real wages are important during economic analysis as it can more accurately provide the inflation rate and the cost of living of a current area. Since, money wages depend on the deal struck between the employer and the employee and are not prone to constant increasing or decreasing in each year, it cannot accurately determine the purchasing power of the people. Real wages are affected by many factors such as purchasing power of money, additional benefits received, working hours, job security, nature of employment, future prospects, social view of the job and cost of training.